The “internet of things” (IoT) refers to the connection of everyday objects to the Internet, enabling these objects to send and receive data. In a blockchain future, your refrigerator will sense that you are running low on eggs and trigger a smart contract that purchases a fresh dozen from your preferred grocer. Once your eggs arrive, you will scan a QR code on the carton with your smart phone and be shown a detailed history of your eggs’ journey from the henhouse all the way to your refrigerator: where the eggs were laid, whether or not they’re organic and even the temperature that they’ve been stored at so you know they’re safe for consumption.

While we’re still a far cry away from your refrigerator autonomously doing your grocery shopping, the technology capable of tracking your eggs’ journey along a supply chain already exists. Singapore’s Vechain is the company responsible for designing it.

On February 26th, Vechain CEO Sunny Lu detailed his plans to launch VechainThor, which is a public blockchain tailored for enterprise adoption. Executives from auditing and quality assurance giants PricewaterhouseCoopers and Norway’s DNV GL joined him on stage. He concluded the presentation by confirming rumors that Vechain is building blockchain solutions for multinational automaker BMW. Needless to say, Vechain already has the support of major international companies.

In the days leading up to the event, I sat down with Vechain COO Kevin Feng to discuss their plans for building the first public blockchain platform suited for enterprise use. I was even able to corner CEO Sunny Lu at the after party to get his thoughts on the future of VechainThor and public blockchains in general.

Vechain Technology – Private Solutions

Vechain is one of the few blockchain companies with the distinction of building blockchain solutions that are actually being used in the real world. Since launching in 2015, Vechain has built private blockchain solutions for clients in the luxury, wine and automotive industries.

Many of the solutions Vechain has developed involve running supply chain logistics on the blockchain. Just as the bitcoin blockchain can autonomously track thousands of daily transactions, supply chain blockchains can track the complex movements of thousands of items throughout a supply chain. The data is recorded on a tamperproof ledger that can be viewed in real time. This is accomplished by implanting smart chips or QR codes on physical items that are scanned every time the item reaches a new destination.

For an undisclosed French luxury handbag company, Vechain embedded computer chips in each handbag that recorded every step in its journey from manufacturer to retailer. Each bag could then be scanned to confirm that it originated from an authentic manufacturer. This eliminated the threat of counterfeiting, which is a multi-billion dollar a year issue for the luxury industry. Vechain implemented a similar solution for Chinese wine importer DIG. Chips are embedded at the top of every wine bottle, recording each bottle’s path throughout the supply chain. Retailers can then scan these chips to confirm that the wine is authentic. If someone tries to open the bottle and replace it with counterfeit wine, the chip is destroyed, signaling that the bottle has been compromised.

Vechain expanded its repertoire beyond supply chain logistics with French car manufacturer Renault Group. For Renault, Vechain built a blockchain solution that essentially creates a unique digital identity for each vehicle – mileage, maintenance history and insurance information are securely recorded to the blockchain.

While Vechain’s clients are happy with these solutions, they are limited because they are being implemented on private blockchains. Unlike public blockchains like Bitcoin and Ethereum that are open to anyone for use, private or permissioned blockchains are restricted to authorized participants. Private blockchains miss out on the network effects that come from free and open collaboration.

If we want our refrigerators ordering eggs from the grocery store that are verifiably safe for consumption , we need the egg producer, grocery store and refrigerator company building solutions under the same blockchain. VechainThor aims to be that public blockchain.

VechainThor – Blockchain For Enterprises

So why not just build these solutions for enterprises on existing public blockchain platforms like Ethereum? After all, Vechain’s private blockchain solutions were built using Ethereum’s open source code.

According to COO Kevin Feng, Vechain has gotten extensive feedback from its partners PricewaterhouseCoopers (PwC) and DNV GL indicating that there are certain aspects of public blockchains like Ethereum that make their large enterprise clients uneasy. These issues are two-fold:

1. Lack of a stable governance model

2. Lack of economic stability

Through my conversation with Kevin, I learned that VechainThor was designed to eliminate the hurdles that prevent large enterprises from building solutions on top of public blockchain infrastructure.

ImprovedGovernance

If you’ve followed Bitcoin’s history, you know that it is rife with contentious debates amongst users, programmers and miners. The most famous of these is the “block size” debate, which was basically a disagreement over how to scale the Bitcoin Network to handle more users and transactions. By design, Bitcoin has no central governance structure and instead has processes in which the entire network collectively makes decisions, which can get messy. The block size debate was particularly messy and ultimately led to a “hard fork” in which the community split into two blockchains – Bitcoin and Bitcoin Cash. Similarly, when the Ethereum community was divided over how to handle a major security breach, one camp ultimately hard forked into Ethereum Classic.

While lack of a central authority is one of the major tenants of the decentralized movement in which Bitcoin and Ethereum are built, the instability that comes from effectively having no one in charge makes large enterprises uneasy. Thus, VechainThor has a more formalized system for making decisions that comes in a form that modern enterprises are familiar with: a committee.

The VechainThor Steering Committee consists of 7 members:

3 members of the Vechain Foundation

2 executives from DNV GL

1 executive from Price Waterhouse Coopers

1 independent member from Hong Kong City University

With the Steering Committee in place, VechainThor has formal procedures for making decisions that affect the overall stability of the network. For example, if scalability issues arose on the VechainThor blockchain, there is a “Technical Committee” tasked with proposing solutions to the Steering Committee. If several viable solutions were presented, the Steering Committee would put forth the ultimate decision to be voted on by the users of the VechainThor network. With the Steering Committee in place, Vechain can make decisions on contentious and critical issues without the risk of hard forks or division of the network.

Proof-of-Authority Consensus Mechanism

All blockchains are made up of a computer network that maintains a shared ledger of transactions. The process in which they agree on the state of the shared ledger is called a consensus mechanism. Bitcoin and Ethereum use “proof-of-work” in which anonymous computers (miners) compete to solve a complex mathematical problem, with the winner updating the ledger and getting rewarded for it. If software developers propose a change to the Bitcoin or Ethereum network and the miners refuse to upgrade their software, the change will not go into effect. This gives miners immense influence over the network.

If Vechain employed this same system and the Steering Committee reached a decision, it would still be up to the miners whether or not to implement it by updating their software. This would effectively negate the point of having a Steering Committee. To avoid this, Vechain employs Proof-of-authority, where all miners are first vetted by the Vechain Foundation and obligated to maintain certain standards.

VechainThor will have 101 vetted miners known as “Authority nodes” whose identities will be public information. Once approved, they will maintain the hardware that validates transactions on the VechainThor blockchain and receive financial rewards for doing so. While they will have the ability to vote on changes to the VechainThor network, they are obligated to implement changes once the vote is final; failure to do so will result in their rights being revoked. This ensures that decisions reached by the VechainThor network can be implemented with finality.

2 Token Economic Model

According to Kevin and Sunny, beyond the lack of governance, a primary reason that enterprises aren’t using public blockchains in any meaningful capacity is because the cost to use the network is too unpredictable. The example they cite is Ethereum and the network’s native currency, Ether. To power applications on the Ethereum network, you must pay in Ether. The price of Ether is directly tied to the value of the Ethereum network, which is subject to wild fluctuations.

To separate the value of the network from the cost of using the network, VechainThor employs a two-token system consisting of VET and VeThor. VET must be purchased to access the network and VeThor tokens are needed to fuel individual actions on the VechainThor blockchain. For example, Wine importer DIG would be required to hold a certain amount of VET to gain the rights to use the platform; they will have to pay small amounts of VeThor to have new location data for their wine bottles recorded to the blockchain.

Just like certain stocks produce dividends, VET produces VeThor. For every 1 VET someone holds, .00042 VeThor tokens are generated every day and credited to the user’s account. This will allow enterprises to calculate their costs and buy the appropriate amount of VET. For example, DIG could estimate that they’ll need 3000 VeThor to cover their Vechain smart contract activity for the year. Instead of purchasing the VeThor directly, they can make a one-time purchase of 20,000 VET that would generate sufficient amounts of VeThor each year (note: purely made up numbers).

In order for enterprises to be able to reliably estimate how much VeThor they will need to run their operations, the price of VeThor must remain relatively stable. To accomplish this, the Vechain Foundation is developing mechanisms that keep the price of VeThor under control. These mechanisms will monitor both the supply, consumption and price of VeThor and adjust the rate in which VeThor is generated when certain price thresholds are reached, thus controlling the supply. For example, if speculators were bidding up the price of VeThor on the open market, the rate in which VET tokens generate VeThor tokens would increase. This increase in supply would then offset the increase in price. These adjustments will be automated based on economic models that the Vechain Foundation is developing with professors at several top universities. These models will be disclosed to the public once VechainThor goes live.

Kevin also told me that there will be options for enterprises to use Vechain as a service without actually having to interact with the VET and VeThor tokens. Vechain can simply price out the cost of VechainThor services for the enterprises in fiat dollars. For example, Vechain could calculate the total cost of the chips that DIG Wine needs to run their anti-counterfeiting solution along with the total VeThor needed to fuel the smart contracts and quote DIG one fiat price. For the enterprise, it won’t be different from paying for any other service even though it involves cryptocurrencies and a public blockchain. Kevin also envisioned that eventually we’d see entire businesses that serve as intermediaries for large enterprises, who handle the cryptocurrency side of running operations on a public blockchain. He even speculated that Vechain partner DNV GL may take on this role for certain clients, given their familiarity with the platform.

Key Partnerships

Vechain believes that it has designed a public blockchain that enterprises will be willing to adopt due to more stable governance and economic models. Whether or not enterprises actually adopt public blockchain solutions using Vechain Thor remains to be seen. With strong partners in DNV GL and PricewaterhouseCoopers, it’s a goal that certainly seems within reach. After all, it’s no coincidence that two executives of DNG VL and one from PwC will be sitting on the Vechain Thor Steering Committee.

DNV GL

While Norway’s DNV GL may not be a household name, they are a massive quality assurance and risk management company with over 80,000 enterprise clients operating in industries around the world. The company is undergoing what it calls a, “global digital transformation” that will employ digitization and big data to solve various challenges its clients face across industries. DNV GL sees blockchain as the future of its business assurance division, which designs and maintains quality assurance programs, including supply chains, for its clients.

At last Monday’s event, CEO of DNV GL’s Business Assurance sector, Luca Crisciotti, stated that after meeting with over 20 blockchain companies, they ultimately partnered with Vechain because of their experience building actual working blockchain solutions for real customers. He also emphasized just how many working technologies the company has already developed with Vechain; not just prototypes. He then alluded to an announcement DNV GL will be making about one of these solutions at Tokyo’s Global Food Safety Conference next week. Given DNV GL’s commitment to a complete digital transformation and their strong partnership with Vechain, it seems likely that many of their clients will be running operations on VechainThor in the near future.

PricewaterhouseCoopers

PwC is responsible for auditing thousands of the world’s largest enterprises. Given blockchain’s capacity for creating tamperproof records of transactions, its application in revolutionizing audit processes for PwC’s clients is obvious. With over 100,000 clients all over the world, including over 80% of the Fortune Global 500, the partnership should open a lot of doors for Vechain.

Beyond providing exposure to potential users of the VechainThor platform, PwC is a vital partner because of its strong understanding of compliance and regulation across a diverse array of industries in regions all over the world. If VechainThor wants enterprises around the world to build applications on its platform, it needs them to remain compliant with their respective regulators. Kevin said that PwC has been integral in advising VechainThor on governance, and KYC (know-your-customer) protocols that will enable enterprise users to remain compliant. With regulators from the United States to Kazakhstan all focusing on blockchain and cryptocurrency regulations in 2018, PwC will be critical in helping VechainThor remain compliant in a fast changing regulatory environment.

Going Forward

I asked Kevin how Vechain plans to get enterprises building applications on the VechainThor blockchain. He compared their approach to Apple in the early days of the IOS app store. Early on, Apple built the majority of applications to attract users. Once the platform caught on, it attracted 3rd party developers who today build the overwhelming majority of applications.

Vechain will continue to use its expertise and proprietary IoT technology to build end-to-end blockchain applications for its clients on VechainThor. The more real world applications that are running on VechainThor, the more enticing it will be for other enterprises to develop solutions that can interact with existing applications. For example, if all Renault and BMW vehicles are storing unique vehicle identity data on the VechainThor blockchain, an insurance company may want to build an application that can interact with that data and automatically issue insurance policies on the blockchain.

One of the first public dApps (decentralized applications) launching on VechainThor is called VeVID - short for Vechain Verified ID. This is a KYC (know-your-customer) application being developed with Japanese Bitcoin ATM manufacturer BitOcean. BitOcean has already developed KYC processes that allow its customers in Japan to use their Bitcoin ATMs in a manner that is compliant under Japanese regulations. Vechain and BitOcean will be migrating these KYC services onto VechainThor so that enterprise users can register their identifies to the platform while remaining compliant to KYC regulations of various regulators.

Thoughts From Sunny Lu

At the after party on the rooftop of Singapore’s Andaz Hotel, I was able to corner Sunny at the bar for questioning. I asked him how he was sure that companies that are already happy with private blockchain solutions would want to use public blockchains like VechainThor. His answer: the same reason they use open Internets over closed intranets – open systems offer network effects that closed systems do not.

He then reflected on his time as an IT infrastructure engineer where he was tasked with building LANs – “limited access networks” consisting of a small number of interconnected computers. He compared private blockchains to LANs, stating that even though they serve their purpose, they lack the potential to evolve into something greater.

“Why build a supply chain for one company on a private blockchain when you can build one supply chain for an entire industry on a public one.”

Disclosure: I own some VEN (soon to be VET)

Please like and subscribe below and share on social media! Follow me on twitter @cryptoambit

Subscribe to CryptoAmbit.com

Kyber Network is a decentralized exchange that just went live on the Ethereum blockchain. Kyber Network is one of the most anticipated projects coming out of Singapore, so, since my arrival, I've spent a lot of time looking into exactly what it is that they're building. At first glance, they're building an exchange for trading cryptocurrencies that uses smart contracts and a system of reserves to guarantee instant trades. A deeper look reveals that the Kyber Network exchange has a secondary function beyond trading one asset for another. The exchange will also be used to facilitate cryptocurrency payments, which could one day bring interoperability to a world where thousands of cryptocurrencies exist.

I asked CEO Loi Luu (pronounced LOY LOO) what Kyber Network will look like in 5 to 10 years if it achieves its goals. His answer? "Kyber Network will be a hybrid of the NASDAQ and Visa. A highly liquid exchange for trading crypto assets that doubles as a facilitator for cryptocurrency based payments."

Large ambitions indeed. Before I dive into the meaning of Loi's statement, some introduction is needed.

CEO Loi Luu

Odds are you've never heard of this 26 year old from the Vietnamese capital of Hanoi... unless you're an Ethereum developer or an Asia-based blockchain investor. Loi Luu wrote some of the first academic papers on Ethereum while obtaining his PhD in Computer Science from The National University of Singapore. Before starting Kyber Network, Loi built a tool for analyzing and identifying security flaws in Ethereum smart contracts called Oyente. He also founded Smart Pool, which is a decentralized mining pool. Loi has been programming since the 7th grade and based on his resume, certainly knows his way around a computer.

Loi Luu - CEO and Founder of Kyber Network

Advisor Vitalik Buterin

One of the reason's there's a lot of buzz around Kyber Network is because of this guy's face on their website:

In the world of cryptocurrencies, anything Ethereum creator Vitalik Buterin touches attracts a lot of attention. In fact, there was a short period where tokens were spiking in value after the founders would get their picture taken with Vitalik and post it to their social media channels. Vitalik's association with Kyber is a little more legitimate than that.

After Loi wrote his first academic paper on Ethereum in 2015, he sent it to Vitalik who replied with feedback. After their initial correspondence, Loi would send and discuss all of his future papers and Ethereum related projects with Vitalik. In mid-2015, Vitalik visited Singapore where the two met and discussed the future of Ethereum. The two remained in touch and when Loi started Kyber Network, he asked Vitalik to be an advisor. Somewhat famously, Vitalik vowed that Kyber Network and OmiseGo, would be the last projects he would advise.

Vitalik is not involved in the day to day operations, but was involved in the early discussions on how Kyber Network should be structured. The team pointed out that it's no coincidence that Kyber Network fits Vitalik's definition for what a decentralized exchange should be.

A Deep Dive into Kyber Network

It's important to first understand why Kyber, along with projects like 0x and AirSwap, are all building decentralized exchanges. From there, we'll take a deep look at how Kyber's exchange will function. After that, we'll see how Kyber's exchange will also function as a payment facilitator.

The Problem With Centralized Exchanges

In 2014, the world's first cryptocurrency exchange called Mt. Gox was hacked for $460 million worth of bitcoin. In 2016, hackers got away with $72 million worth of bitcoin from the Bitfinex exchange. In January of this year, the biggest hack to date occurred when $562 million worth of the cryptocurrency NEM was stolen from the Coincheck exchange. The Friday before Kyber went live, $170 million worth of a cryptocurrency called Nano was stolen from the BitGrail exchange.

These hacks happen because major exchanges hold massive amounts of cryptocurrencies on behalf of their users in a central location - thus, they are "centralized" exchanges. Cryptocurrencies use a combination of what are called public and private key encryption to function. These keys are long, randomly generated strings of characters that allow people to send and receive cryptocurrency. If someone is going to pay you, they direct the payment to your public key. If you want to pay someone else, you need your private key to authorize the transaction. If a hacker gets a hold of your private key, they can authorize transactions to cryptocurrency wallets that they control.

Exchanges hold millions of dollars of its users' funds in wallets on a central server. If a hacker can breach that server and steal the exchange's private keys, they can move everyone's funds out of the exchange and into a wallet controlled by the hacker.

The Decentralized Difference

Decentralized exchanges facilitate trades without ever taking custody of users' funds. They do this by using smart contracts executed on blockchain networks like Ethereum to enable trades peer-to-peer. If I want to trade 1` Ethereum for 70 OmiseGo tokens, the smart contract finds someone willing to part with 70 OmiseGo tokens in exchange for 1 Ethereum and makes the swap directly. The instant the Ether leaves my wallet I receive the OmiseGo; the funds are never in the custody of the exchange.

This exchange is decentralized because it consists of smart contracts that live on a blockchain network. The trades are executed by computers (miners) all over the world rather than on a central server - there is no single point of failure for a hacker to attack.

Of the decentralized exchanges being introduced (0x, Airswap and Kyber) Kyber is arguably the most decentralized since it runs completely on the Ethereum blockchain. While 0x and Airswap don't take custody of user funds, their smart contracts match buyers and sellers by consulting order books maintained on central servers. If these order books were compromised, it could be problematic for users. All trades on Kyber Network take place 100% on the Ethereum blockchain.

The Liquidity Problem

There are already several decentralized exchanges on the market. Despite the obvious security advantages, none currently handle significant volume. Decentralized exchanges like EtherDelta and IDex only handle about $4 million in trade volume per day. This is very low when compared to major centralized exchanges like Binance and Bithumb that handle billions every day. The major problem that stems from trading on an exchange with low volume is the lack of liquidity.

Liquidity measures the ease of buying or selling a particular asset at a stable price. Selling traditional stocks like shares of Apple Inc. on the Nasdaq is a highly liquid market because at any given time, there are plenty of people willing to purchase the stock from you at the going market rate. An example of a highly illiquid market would be selling refrigerators in exchange for toasters on Craigslist. Odds are at any given time, there aren't a lot of people on Craigslist looking to sell their toasters in exchange for refrigerators so you're going to have a tough time making that trade happen.

While this is a silly example, if you're trying to trade cryptocurrency on an exchange with low volume, it can feel like trading refrigerators for toasters on Craigslist. On a low volume exchange that suffers from low liquidity, finding someone to trade with takes a much longer time and the users often have to settle for undesirable prices.

Kyber's solution to the liquidity problem? Guarantee it through a system of reserves.

Kyber Reserves

The Kyber Reserve system is where Kyber Network differentiates itself from the rest of the decentralized exchanges on the market. You can think of a Kyber Reserve as a big pool of cryptocurrencies that are always available for trading. The equivalent in the traditional finance world is called a "market maker."

In foreign exchange markets, a market maker for the currency pair [Japanese Yen/US Dollar] is someone who has a lot of Yen and US dollars available for trade at all times. If an institution thinks that the USD is going to weaken and the Yen will strengthen, they can sell their USD to the market maker in exchange for Yen. The market maker profits through the "spread." If 1 USD = 100 Yen and the spread is $0.05, the market maker will profit 5 cents by accepting $1.05 in exchange for 100 Yen. There are usually multiple market makers who compete against one another for business by offering the best rates and the lowest spread.

Kyber Reserves will function in the same way but with cryptocurrency pairs. Anyone with a lot of OmiseGo and Ether could be an [OMG/ETH] market maker by committing their funds to a Kyber Reserve. The reserve manager will set the rates in which they're willing to trade OmiseGo for Ether and vice versa and will set their own spreads. These reserves will always be available to users of the Kyber Network for trading. Kyber's goal is to have multiple reserves for each pair that will compete for business by offering the best rates with the lowest spreads.

Who Will These Market Makers Be?

Foreign exchange market makers tend to be people with a lot of spare currencies lying around who want to put their idle assets to work - typically banks and financial institutions. Similarly, Kyber Network Reserve managers can be anyone with large stockpiles of cryptoccurrency. This could hypothetically be any of the following:

Whales - Whale is a term for an individual with huge stock piles of cryptocurrency. A whale could commit their funds to a Kyber Reserve and profit from the spread.

Centralized Exchanges - Exchanges like Binance or Bittrex that collect millions in transaction fees in various cryptocurrencies could profit from managing Kyber Reserves.

Fund Companies - Companies that invest in ICOs can put their assets to work by establishing Kyber Reserves.

Project Founders - Founders of new cryptocurrencies all face the task of getting their token into circulation. A way for token issuers to do that could be to establish Kyber Reserves of their own coin to give the market access to it.

How Do Reserves Work?

To set up a Kyber Reserve, the reserve manager commits funds of any two cryptocurrencies to an account connected to a Kyber Network smart contract. Kyber has built software that allows the reserve manager to set their own spreads and rates. Kyber is not the custodian of these funds.

According to Loi, a small amount of reserves can support a large amount of trading. Let's say a reserve contributor commits 150 Ether and an equivalent amount of OmiseGo (11,000 OMG at current rates). If a user wants to buy 1 Eth for 70 OMG tokens, the reserve receives 70 OMG tokens and loses 1 ETH. If a user wants to buy 70 OMG for 1 Eth, the reserve will lose 70 OMG and gain 1 ETH. Under market conditions where Kyber users are buying and selling similar levels of Ether and OmiseGo, the reserve will maintain its initial level of both ETH and OMG and can maintain a trading volume that exceeds its total contribution (i.e. 150 Eth /11,000 OMG reserve can support 1,500 ETH / 110,000 OMG trade volumes).

If Kyber users start heavily selling Ether to buy OmiseGo, this would cause the reserve's OMG levels to deplete and its Ether levels to accumulate. This is where Kyber's rebalancing feature kicks in. The Kyber Reserve software has a function that uses a combination of trading bots and smart contracts connected to major exchanges like Binance, Bittrex and Huobi. In the scenario described above, Kyber's automated software would trade the excess Ether for OMG with the centralized exchange offering the best rate to bring the reserve back to its original levels. This lets reserve managers profit from their assets while still maintaining their original investment.

Kyber Network Crystals - KNC

Kyber Network's native asset is the Kyber Network Crystal (KNC) which is an essential part of the reserve system. To earn the right to profit from spreads on the Kyber Network, Kyber Reserve managers are required to purchase KNC. When a reserve completes a trade and profits from the spread, a percentage of that profit is paid to the Kyber Network in KNC.

Kyber Network uses the KNC to pay for its operating costs and to pay its supporters. For example, a wallet that integrates with Kyber Network will get a percentage of the KNC payment as a referral fee for sending a user to the network. Once supporters and operating costs are paid, the remaining KNC is "burned", which means that its taken out of circulation. As more reserves are opened and the total supply of KNC is gradually lowered due to the token burning, demand for KNC tokens should increase over time.

If you are speculating on KNC, you are rooting for a robust network of Kyber Reserves because demand for KNC tokens is proportional to the amount of reserves in operation.

Trading on Kyber Network

While Kyber Network will allow whales, exchanges and funds to profit from their idle assets, the exchange was built with convenience of the end user in mind. Users will be able to easily connect to the Kyber Network without setting up an account through the following ways:

Software Wallets - Users of software wallets that integrate with Kyber Network will be able to connect directly from their wallet. So far, Kyber's list of wallet partners includes ImToken, Coin Manager and Trust Wallet. Once Kyber is available to the public, users of these wallets will see the Kyber option in the wallet's user interface.

Once connected to the Kyber Network via hardware or software wallet, trading is very simple. The user will see all of the trading pairs offered by Kyber Network. Any pair that a user sees will have at least 2 supporting reserves and will be available for instant trading.

If the user wants to trade Ether for OmiseGo tokens, they will select the ETH/OMG trading pair and enter the amount of Ether they want to exchange. Users will be presented with a price suggested by Kyber Network that reflects the going market rate, but will have the option of selecting the minimum rate that they are willing to accept.

The user has to pay a small amount of Ether to the Ethereum network for handling the transaction - this is called a "gas" fee and is paid to the Ethereum miner who ultimately adds the transaction to the Ethereum blockchain. With the exchange rate and the gas fee set, the user presses "exchange".

From there, the Kyber Network smart contract goes to work. If I indicated that 60 OMG tokens was the minimum I was willing to accept in exchange for 1 Ether, the Kyber Network smart contract takes that information and finds the best rate offered by the various [ETH/OMG] reserves. If one reserve is offering 60 OMG per 1 Ether and another is offering 65 OMG, the smart contract will select the 65 OMG rate.

Once the smart contract identifies the best rate, this transaction is broadcasted to the Ethereum network. Once the transaction is added to a block in the Ethereum blockchain by a miner, my wallet is credited 65 OMG tokens and debited 1 Ether plus the gas fee. The swap from Ether to OmiseGo happens simultaneously and at no point are my funds in the custody of Kyber Network.

Kyber Exchange In A Nutshell

Kyber is creating a highly liquid decentralized trading platform using a system of reserves that will allow users to trade one token for another with a few clicks of a button.

So that's what Loi meant when he said he wants to build something on par with the Nasdaq. What about the Visa part? Well, it turns out that in addition to trading, Kyber's system of reserves can also be used to facilitate payments.

Kyber Exchange to Facilitate Payments

When I go to any one of the 500 Starbucks in Singapore, I use my credit card that is connected to my bank account containing American dollars. When the barista swipes my card to pay for my Grande Cold Brew, the Visa network goes to work getting American dollars from my bank account and paying the equivalent amount of Singapore dollars to Starbucks. Just as the Visa network allows me to pay for my coffee with American dollars and for Starbucks to receive Singapore dollars, Kyber plans to use its decentralized exchange to facilitate cryptocurrency transactions that require the conversion from one cryptocurrency to another.

Let's say a merchant only accepts Ether, but I want to pay with OmiseGo. If the merchant integrates one of Kyber's payment APIs, that won't be a problem. I can pay the merchant with OmiseGo and a Kyber Network smart contract will use one of the [ETH/OMG] reserves to swap my OmiseGo for the appropriate amount of Ether and pay the merchant. This all happens in the background without myself or the merchant giving it much thought.

WAX Token Example

Now let's take a look at how one of Kyber Network's existing partners can benefit from integrating a Kyber payment API. WAX is a blockchain platform for trading virtual goods. Someone who unlocks a rare weapon playing the popular game Counterstrike, for example, can sell this item to another player using WAX's platform. However, to buy this virtual weapon on the WAX platform, the item has to be purchased using WAX tokens. What if the person who wants to buy this virtual item only has OmiseGo tokens? Kyber Network to the rescue.

By integrating with the Kyber payment API, users will be able to make purchases on the WAX platform without actually having to own the WAX token. To pay for the virtual weapon with OmiseGo, the user will be quoted the price in OmiseGo tokens. Once the payment is submitted, a Kyber Network smart contract will tap into a [WAX/OmiseGo] reserve, make the conversion at the market rate and issue the payment to the seller in WAX tokens. Neither buyer nor the seller is aware that Kyber Network is even involved.

The Bigger Picture

Consider some of Kyber's other partners - Request Networks, AppCoin, and StormToken - each of these are applications that will benefit from having Kyber Network payment conversions running in the background. For example, Request Network is an application that allows users to request payments in the form of the REQ token. If a diverse set of reserves are established, the Request Network platform will be usable to a much wider audience. To continue with our OmiseGo example, someone could request a payment of 10 REQ, the payee can send the equivalent amount of OMG, and the requester still gets paid in REQ. Kyber smart contracts are running behind the scenes to make this payment possible.

We're moving towards a world where the currency one uses will be a matter of personal choice. Some people will prefer bitcoin, some Ether, some Zcash etc. There will also be hundreds of applications that leverage blockchain technology effectively that also require the use of a token - Wax, Request Network etc. In a world where many different cryptocurrencies are in use and thousands of tokens exist for various services, there will need to be some way to make all of these assets interoperable. If Loi Luu and the Kyber team accomplishes their goals, Kyber Network could be the glue that binds a complex world of cryptocurrencies together.

A Long Way to Go

To reach their ambitions of becoming a NASDAQ/Visa hybrid, Loi and the Kyber team are very aware that they have their work cut out of them. There are two main hurdles they will have to overcome:

Implementing Cross-Chain Trading

Developing a robust system of 3rd Party Reserves

Cross-Chain Trading

In 2018, Kyber Network will only offer trading between Ether and Ethereum based tokens (ERC-20). This is because the technology that will allow decentralized exchanges to trade Ethereum tokens with tokens on other blockchains (Bitcoin, ZCash, NEO) is still being developed. Loi equates trading "cross-chain" to two people that speak completely different languages trying to have a conversation. Right now there is nothing to translate one blockchain language to another, but that technology is on the way. Protocols like Cosmos, Polka-dots, Icon, Wanchain and Aion are all working to make these conversions possible. Kyber recently announced a strategic partnership with South Korea's Icon network to collaborate on cross-chain technology.

Kyber's plan is to integrate whichever solution best fits their needs. In this respect, the end goal is clear but the pathway to get there is not. Once suitable cross-chain technology becomes available, it will be up to the Kyber engineers to successfully weave it into the platform.

Developing Reserves

Kyber's long term goal is to have a diverse system of 3rd party reserves operated by people all over the world. The more reserves offered, the more useful the Kyber platform becomes. In order to accomplish this, they'll have to convince potential reserve contributors that running a Kyber Reserve is a profitable endeavor.

Upon launch of the mainnet, for every pair that is offered, one reserve will be operated by Kyber Network and one will be operated by an Israeli based crypto investment fund. To scale to the size of Kyber's ambitions, they'll need hundreds or even thousands of 3rd parties to maintain reserves for thousands of trading pairs to be available. The best way to accomplish this? Demonstrate that Kyber's own reserves are profitable.

Showtime

For Kyber Network, the ambition, the hype and also the challenges are there. Now that it's live and running on Ethereum, it's time for Loi and team to deliver.

Disclosure: Over the course of writing this article, I purchased some KNC

When I first started getting interested in blockchain and cryptocurrencies 8 months ago, I would watch the wild swings of the market on CoinMarketCap every day. When I noticed a particular coin moving sharply in one direction or the other, I would try and figure out why. The answer 9 times out of 10: heavy trading in South Korea.

South Korea is responsible for 30% of all cryptocurrency trading, despite representing less than 1% of the world's population. When I decided to go on this crazy Asian cryptocurrency expedition, one of my goals was to go to South Korea to try and understand exactly what the hell was going over there. Well, two days after arriving in Seoul I somehow found myself taking shots of some type of clear Chinese liquorwith Simon Seojoon Kim - CEO of Hashed - South Korea's largest cryptocurrency and blockchain investment fund. Simon, along with Hashed partners, Jinwoo Park and Alex Shin, were able to lay out for me exactly what makes South Korea the most active cryptocurrency market in the world.

Hashed

Simon was one of South Korea's earliest Ethereum investors and is a veteran of several startups. In 2017, he founded Hashed alongside a team of serial entrepreneurs and software engineers. To date, Hashed has invested in 30 early-stage blockchain projects and is accelerating 4 of them. Two of the projects in Hashed's accelerator program, Icon and Mediblock, are among the cryptocurrency top 100 with a combined market capitalization of over $3 Billion dollars.

Simon Seojoon Kim - CE0 of Hashed

Basically, I couldn't have found more qualified people to break down exactly why cryptocurrencies are more popular in South Korea than anywhere else in the world. According to Simon and the Hashed guys, it comes down to culture, demographics, politics and a bit of timing.

Culture

In America, people are still struggling to wrap their heads around Bitcoin and cryptocurrencies. People who have spent their lives investing in tangible assets like real estate or commodities have trouble fathoming that something intangible, existing purely in the digital world, could possibly be worth thousands of dollars. In South Korean culture, where people have valued digital goods long before Bitcoin came along, the idea that something existing strictly in cyberspace could be valuable was an easy concept to grasp.

South Korea is a nation of 51 million people whose GDP ranks 12th in the world. Despite its modest population and economy when compared to countries like the United States and China, South Korea spends the 3rd most of any country on purchases in the Google Play app store. In 2017, South Koreans spent over $3 billion dollars in Google's app store on digital goods - character avatars, digital gifts and application upgrades. On a game called Lineage, which is a multiplayer RPG similar to World of Warcraft, players spend up to $1,000 for limited edition digital swords and axes. Since Koreans already had no trouble assigning high values to digital goods and were comfortable with purchasing them, buying cryptocurrencies wasn't a radical departure from their existing spending habits.

Another element of South Korean culture that attracted its population to cryptocurrencies is its love for gambling. Simon told me that when Korean families gather for the holidays, it is common for the entire family to gamble together over various card games. Despite gambling's prevalence in South Korea, it was made illegal by the government a long time ago. Typically, when governments ban something that people enjoy, they find a way to do it anyway. When the cryptocurrency market came along, people observed the wild fluctuations and fortunes being made and viewed it as a virtual casino that the government hadn't outlawed.

Demographics

Alex Shin, who heads Hashed's San Francisco operations, cited South Korea's demographic composition as a big reason for cryptocurrencies' explosion in popularity. Roughly half of South Korea's 51 million people live in the capital city of Seoul. Seoul has twice the population density of New York City and 4 times that of Los Angeles. South Korea has the fastest internet connection in the world with 93% of its population online and hyper-connected through social media. When you have millions of people living in a densely packed metropolitan city who are in constant communication, word travels fast.

Hint: That big red area is Seoul

South Koreans didn't have access to purchasing Bitcoin when it started its ascent in 2012. When Ethereum broke through $1 USD in early January 2016, South Korea had a number of exchanges operational and people saw it as the opportunity to invest in "the next Bitcoin". When the price of one Ether climbed from $1 to over $40 in the first 4 months of 2016, word of the 4000% returns spread like wildfire, and everybody and their grandmother went on an Ether spending spree. Word of the massive gains to be made investing in the altcoins like Ripple, Litecoin, Monero continued to dominate South Korean social media throughout 2017.

In the United States, less than 1% of the entire population owns cryptocurrency in any form. According to recent polls, 30% of salaried workers in South Korea own cryptocurrencies, while Simon estimates that the real figure is closer to 50%. This does not include retirees who have also invested significant amounts. In the United States, cryptocurrency adoption is still somewhat confined to a small percentage of the millennial generation. Simon said that in South Korea, awareness of cryptocurrencies is practically ubiquitous and it's not uncommon to overhear grandmothers at a cafe discussing their altcoin portfolios.

Politics & Timing

The cultural and demographic ingredients were in place to fuel South Korea's crypto explosion. However, something as speculative as the cryptocurrency market is not something the government here would typically embrace. After all, they banned their citizens from gambling out of concern for the corrosive effect it could have on the Korean people. So when speculative fever hit South Korea in early 2016, why didn't the government step in and try to control it? Turns out, at the time, they were preoccupied with a political scandal that would end with the impeachment of their president.

The impeachment of President Park Geun-Hye that stemmed from her relationship with a shadowy figure named Choi Soonsil is a fascinatingly bizarre story. Park Geun-Hye was the daughter of a powerful military commander and politician. After her mother and father were each assassinated, Choi Tae-min - the leader of a cult like organization called The Church of Eternal Life, took her in. Choi told Park he could communicate with her deceased parents and gained a great deal of influence over the young future president. He used her status as a member of the South Korean elite to garner political favors. After Choi died, his daughter, Choon Soonsil stepped in as Park's main confidant and manipulator. The media eventually got wind of how much influence Choi Soonsil had over President Park. It was revealed that Soonsil was editing most of Park's speeches and briefing Park's cabinet despite having no official government title. Furthermore, the ties to her father's shamanistic cult made the Korean people very uneasy. Choi Soonsil would eventually be indicted for using her relationship with Park to get large companies to donate over $70 million dollars to non-profit foundations that Choi controlled. By October 2015, the Korean people had enough and took to the streets in massive numbers calling for President Park's impeachment.

The protests raged on from October 2015 until Park was removed from power in March of 2016. During this time, the price of Ethereum went from under $1 to over $10 USD and word was spreading fast around Seoul. It's hard to say what exactly the government would have done had they not been embroiled in scandal, but it is likely they would have imposed some sort of restrictions - either an all out ban or an imposed limit on the amount of cryptocurrency someone could buy at one time. Unlike Coinbase, America's biggest exchange where individuals can only purchase cryptocurrency in $10,000 intervals, the Korean exchanges had no such limit. As a result, the average wealthy Korean was purchasing in $100,000-$500,000 intervals. When others got wind of how profitable these investments were, it became common for people to mortgage their homes in order to get in on the action.

Questions Answered

To sum it all up, a tech savvy nation that highly valued digital goods and also had a penchant for gambling without a viable outlet was naturally drawn to cryptocurrencies. The densely packed and hyper-connected composition of Seoul allowed for word of the massive gains being made from cryptocurrency investments to spread rapidly throughout the population, creating a mania. The rise of cryptocurrency's popularity coincided with political turmoil that distracted the government from a situation that under normal circumstances, it would have tried to control.

Once I understood how South Korea developed it's ravenous appetite for cryptocurrencies, I followed up with Simon at Hashed's office in Gangnam (yes, as in Gangnam Style) to discuss where he thought this was all going.

Regulations and Government

After the dust settled and President Moon Jae-in was elected, the government took a look at the situation that transpired amidst its own chaos and didn't like what it saw - a nation heavily invested in an asset that the government didn't fully understand. At multiple stages throughout 2017, the government expressed skepticism and negative sentiment towards cryptocurrencies.

When the South Korean Minister of Finance said during a radio interview in early 2018 that a ban on cryptocurrencies was "a live option," it sent the markets into a panic. In the following days, the market shed over $300 billion dollars in the sharpest correction in recent memory. After the comment, outraged South Koreans generated a presidential petition with 200,000 signatures urging the government not to move forward with a ban. The government eventually backtracked, stating that there would be no bans but that regulations would be coming.

On January 23rd, the governement announced that regulations would go into place effective January 30th. The government stated that it will put an end to "anonymous trading," meaning that only trading from accounts associated with legal South Korean citizens will be permitted. This will allow the government to tax gains while preventing minors and non-Koreans from trading cryptocurrencies on Korean exchanges.

Future Ban Unlikely

I asked Simon if he thought there was any possibility that the government would move forward with a ban in the future. He thinks that in the future, the government will be stewards of the crypto-economy as opposed to adversaries of it; his logic seems solid.

Whether the government likes it or not, Korea is already heavily invested in cryptocurrencies and there's nothing anyone can do to change that. It's also impossible to ignore the fact that Koreans have prospered more from the cryptocurrency boom than any other nation in the world. At the same time, given their level of exposure, they would be disproportionately affected by a major market downturn. Basically, the only thing the government can do is support the growth of the cryptocurrency market because a healthy market is good for South Koreans.

If America or China banned trading, only a small percentage of their populations would be affected. A Korean ban would create widespread panic and could cause systemic damage to the Korean economy. Not to mention that South Korea is a democracy, so any politician that takes an anti-cryptocurrency stance is likely to find themselves without a job come election time.

Upcoming Trends and Optimism for the Future

With a future ban on cryptocurrency trading unlikely, I asked Simon what he thought we should expect from blockchain and cryptocurrencies in the coming years within South Korea and beyond.

Simon is optimistic about the future of blockchain and cryptocurrencies because he sees them as a means of bringing about a more equitable society. He explained that the current corporate structure creates a divide between corporations, shareholders and customers. Corporations are required to maximize the profits of their shareholders, often at the expense of their customers. Only a small percentage of people get to be shareholders. By the time corporations issue shares to the public they're already billion dollar companies so most of the value has been created. In a distributed and tokenized economy, the average person can participate in value creation from the onset by participating in an ICO (Initial Coin Offerings are a way of funding early stage blockchain projects that are open to the public). In a decentralized economy, end users will have more ownership over the services and products they use and thus, share in the value they create.

One of the major trends he sees coming is major corporations decentralizing themselves by moving to the blockchain and "tokenizing" their products and services with their own cryptocurrencies. Last year, all of the blockchain and cryptocurrency product pitches Simon heard were from startups. This year, he says that the majority are from large companies. It appears that corporations are starting to see the writing on the wall and are moving towards decentralization in order to avoid being replaced by a blockchain based competitor.

One of the trends Simon foresees in the longer term sounds straight out of science fiction. "In the future, instead of working for companies, people will work for protocols." For example, instead of being a cab driver for Uber, people will drive for decentralized ride sharing protocols running on a blockchain, owned and maintained by a collective of tokenholders. Instead of paying a large cut of each ride to a centralized company, the passenger will pay a transaction fee to the miner whose computer executes the smart contract that enabled the ride to take place - the driver keeps a much larger cut of the fare. People who improve the overall network by contributing resources will be compensated in cryptocurrency based on the value they provide.

South Korea - A Technological Trendsetter

South Korea has a unique set of characteristics and attributes that created the perfect environment for the embracement of cryptocurrencies as a vehicle for speculative investment. These same attributes make it highly likely that South Korea will be the first region to see widespread adoption of cryptocurrencies and blockchain as a technology. That begs the next question: will the rest of the world catch up?

Simon pointed out the last technological trend that South Korea embraced well before the rest of the world: social media. The world's first major social network was South Korea's Cyworld, introduced in 1999 when Facebook was still a twinkle in Zuckerberg's eye.

I'll end on an overly used quote that may or may not have been said by Mark Twain. "History doesn't repeat itself, but it often rhymes." Time will tell.

Starting to wrap your head around Bitcoin and blockchain? What's this now? Coinbase just abruptly listed something called Bitcoin Cash that temporarily spiked to over $8,000 before they had to suspend trading due to overactivity. Well what the hell is Bitcoin Cash? Simple: it's a fork of Bitcoin. Proper response: what the fork are you talking about?

Before we get into exactly what a fork is and how it led to Bitcoin Cash, let's have the cryptocurrency equivalent of the "birds and the bees" talk and discuss how new cryptocurrencies are born.

Open Source Code

Ever wonder why there are so many different cryptocurrencies? This is because Bitcoin software is open-sourced. This means that any programmer can download the Bitcoin source code, make some tweaks and then release it on the internet as a completely new cryptocurrency - an "alt-coin." If that programmer can convince enough miners to dedicate computer resources to maintaining the new coin's blockchain, and if they can convince enough people that their Bitcoin offshoot has value, a new alt coin is born.

Altcoins have the same basic architecture as Bitcoin. They have miners that run software that maintains a shared history of the altcoin's transactions on a blockchain. These miners are paid in the altcoin as a reward for helping to maintain the blockchain and these rewards circulate new supply of the coin. From that basic framework, programmers get creative. They make new coins that improve speed (Litecoin), that are more anonymous and harder to track (Monero), that have a niche end user in mind (i.e. PotCoin), or that have functions far beyond just being a digital currency (i.e. Ethereum).

One of the most successful altcoins is Litecoin. An MIT graduate and Google software developer named Charlie Lee took the Bitcoin source-code and tweaked it. He made a more agile version of Bitcoin by making transaction speeds 4 times faster - new blocks of transactions are added to Litecoin's blockchain every 2.5 minutes compared to every 10 minutes with Bitcoin.

Bitcoin Cash however, was not spawned by some enterprising programmer taking the Bitcoin source-code and starting a new coin from scratch. Bitcoin Cash was created by a faction within the Bitcoin community which disagreed with how Bitcoin was evolving. They gained enough support to split the Bitcoin blockchain in two - the split that created Bitcoin Cash is called a hard fork.

The Scaling Debate

When the Bitcoin network is experiencing heavy traffic, transactions take longer to process and transaction fees paid to miners become more expensive. Transactions are processed once they are added into a new block by a miner - the size of a block is 1 megabyte (MB) which can only fit about 2,500 transactions per block. Blocks are added roughly every 10 minutes so when there are more than 2,500 transactions pending, people have to wait their turn. Miners pick which transactions to include in a new block. If someone wants to get their transaction processed quicker, they can elect to pay a higher fee so that a miner is more likely to select it. When the network is busy, the fee needed to get a transaction processed in a timely manner gets bid up higher and higher (if you use an exchange like Coinbase, they automatically suggest a fee that will get the transaction processed quickly - that fee fluctuates based on current demand on the network).

With the popularity of the Bitcoin network at all time highs, so are wait times and transaction fees. Sending $100 USD worth of Bitcoin can cost $30 and take hours to get processed when the network is busy. The development community that collectively updates and improves Bitcoin's open-source code has long known that this would be an issue once a certain level of adoption was reached. The best method for addressing these issues and scaling Bitcoin for a larger user base has been hotly debated for years and ultimately divided the community.

Club Blockchain

Analogy time.

Think of a block in the blockchain as the hottest club in town with limited space (1MB) - transactions are all the people standing in line to get into the club (get processed) and the miner is the bouncer who decides who gets in. Party goers pay a cover charge (transaction fee) to the bouncer to get into the club. The bouncer gives preference to those willing to pay a higher cover charge. When the line to get into the club gets long, people have to pay a higher cover charge to get in. The Bitcoin community came up with two methods to reduce the size of the line and get more people into Club Blockchain at once:

Make the club bigger - One side wanted to simply make the club bigger. By increasing the size of the club, more people could get in at once.

Technical terms - increase the block size from 1 MB to 8 MB

Make the people skinnier: One side wanted to make each individual party goer skinnier. If all the party goers were skinnier, more of them could fit into the same size club.

Technical terms - SegWit, or segregated witness, is a method for removing some of the data from each transaction, allowing for more transactions to be included in a 1 MB block.

A Community Divided

So that's the debate - increase the blocksize or implement a solution that would get more transactions into a 1MB block (SegWit). Sound pretty technical and boring? Well, within the Bitcoin community, the debate got highly contentious and political.

Opponents to increasing the block size said that an increase would erode Bitcoin's most important feature: decentralization. Increasing the blocksize would greatly increase the computer memory needed, and therefore the cost required to have a computer that validates transactions in the Bitcoin network (a full node). This cost increase would price out most of the smaller operations, leaving the Bitcoin network in the hands of only the most powerful mining pools and companies that could afford it. If control of the Bitcoin network was in the hands of a few, it would be easier for a government or powerful entity to take it over. These opponents favored SegWit as the safest way to scale Bitcoin without compromising decentralization. Many in the SegWit camp were the developers and engineers who prioritized Bitcoin's security and decentralization over the network's ability to process transactions cheaply.

Proponents of increasing the block size argued that Bitcoin was no longer useful in commerce as originally intended in Satoshi Nakamoto's white paper. Since increasing the blocksize would be an immediate remedy to the congestion and high fees, and SegWit would take years to fully cure the issue, they saw a block size increase as the only option. Many in favor of increasing the block size were business owners and entrepreneurs who were transacting in Bitcoin on a regular basis, frustrated by the high fees.

When it became apparent that the majority of the community was in favor of moving foward with SegWit implementation, the wheels of the Bitcoin Cash hard fork were set in motion.

Hard Forks

A hard fork is the blockchain equivalent of a software update, reserved for serious changes to the network. The Bitcoin network is maintained by computers all over the world collectively updating the Bitcoin blockchain. They are all running software that enables this collaboration. When a significant change needs to be made to how the network functions (i.e. a change in the blocksize), a software update is written and pushed to the computers in the network - it is up to them to download the updated version.

If everyone in the network is on board with the change and they all implement it, they can all continue collectively maintaining the blockchain with the change in effect. However, if only half update and half do not, the network becomes out of sync. This causes a chain split, or fork - when the computers update, they begin maintaining a different blockchain from the ones that chose not to update.

This is why hard forks are a risky way of introducing changes to a blockchain network. If a change is proposed that not everyone is on board with, the network is at risk of becoming divided.

The Bitcoin Cash Hard Fork

The Bitcoin Cash hard fork was what's called a "contentious hard fork." The contingent in favor of increasing the block size knew that they were not going to get the majority of the network to go along with the upgrade. They just had to secure enough miners in the network to go along with the upgrade for their forked version of Bitcoin to maintain value. If they didn't have enough miner support, there would be no one to maintain the network and the 8MB block size version of Bitcoin would have died a quick death.

On August 1st 2017, the Bitcoin Cash hard fork happened. A software update including the 8MB blocksize was pushed to the network and it garnered enough support from the mining community. Bitcoin users were told that however many Bitcoins they held at the time of the fork, they now had an equal amount of Bitcoin Cash. Why? Well, remember when I said Litecoin is basically a copy of the Bitcoin source code with some tweaks? Bitcoin Cash is also a tweaked version of the Bitcoin code but, unlike Litecoin, Bitcoin Cash also copied the original Bitcoin blockchain.

This means that Bitcoin and Bitcoin Cash have a shared transaction history up to August 1. If the Bitcoin blockchain listed your address as having 1 Bitcoin on August 1, the forked Bitcoin Cash blockchain would indicate the same thing. After August 1, the miners in the network that upgraded to the 8MB began maintaing the Bitcoin Cash blockchain while the miners who did not upgrade continued maintaining the original Bitcoin blockchain - on that date, the Bitcoin blockchain "forked" into two:

Looks more like a "fork in the road" rather than the utensil

After The Fork

At the time of the fork, no one was really sure what was going to happen with Bitcoin Cash. It was dismissed by many as a gimmick that would be worthless in a matter of months. At the same time, since every person holding Bitcoin was gifted an equal amount of Bitcoin Cash, many people had an automatic interest in its value. At the time of the hard fork, the value of Bitcoin Cash set by the free market was around $300 dollars, compared to Bitcoin's $2,700 price tag.

Despite many detractors, there was also a vocal group of Bitcoin Cash supporters who began calling for "The Flippening" - a prediction that Bitcoin Cash would overtake the original Bitcoin in value. They argued that Bitcoin had lost its way and was no longer useable as a currency due to its high fees - they claimed that Bitcoin Cash was the "real Bitcoin" since it was more in line with Satoshi Nakamoto's original vision. People reacted to these projections and, during the month of August Bitcoin Cash's value was bid up 300% to $900. This price hike was short lived and the value soon returned to $300.

Once again, in November 2017, calls for The Flippening grew louder when an initiative to scale Bitcoin (called Segwit2x, not to be confused with SegWit, goddam its all so confusing) was called off due to lack of consensus in the community. Bitcoin Cash supporters cited this initiative's failure as further evidence that Bitcoin would never scale. The movement gained steam when programmer Gavin Andresen - who Satoshi Nakamoto left as Bitcoin's lead developer before he disappeared - stated that Bitcoin Cash more closely resembled the project he began working on in 2010. Bitcoin Cash's value shot up to $1,800 while Bitcoin's fell from $7,500 to $5,800. Bitcoin Cash settled around $1,200 while Bitcoin rebounded and continued its ascent to it's 2017 peak of $20,000.

The latest Bitcoin Cash boom came on December 20th 2017 when Coinbase, one of the most popular cryptocurrency exchanges, made a surprise announcement that it would enable Bitcoin Cash trading. People looking to cash in on the latest coming of "The Flippening" flooded Coinbase with buy orders, bidding the price up as high as $9,000 - this coincided with a 10% dip in Bitcoin as it fell below $12,000. Unable to handle the traffic, Coinbase temporarily halted trading, freezing the price at $8,000. When Coinbase resumed trading, the price fell back below $3,000. Amid heavy criticism, Coinbase had to launch an internal investigation into potential insider trading, since the price in Bitcoin Cash started soaring beforeit was announced that Coinbase would support Bitcoin Cash trading.

Is Bitcoin Cash Actually Better?

Currently, transacting in Bitcoin Cash is significantly cheaper than Bitcoin, with average transaction fees at $0.32 vs $26.27 at the time of this writing. Since more transactions can be included in a single block, transactions will also get processed quicker. However, the Bitcoin Cash network only handles about 12% of the daily transactions that Bitcoin is saddled with. Its difficult to know how exactly the Bitcoin Cash network would respond if faced with a heavier load. At this point, it is just too early to tell.

What's Bitcoin's Plan?

SegWit has been implemented within the Bitcoin network through what's called a soft fork - contrary to a hard fork, soft fork changes can be rolled out to the network without causing a chain split. However, the potential benefits of Segwit will not be realized until SegWit is activated by those using the Bitcoin network. To go back to our earlier analogy, in order for Segwit to "make the transactions skinnier", the applications that generate Bitcoin transactions need to weave it into their systems. Coinbase, for example, has not yet done this so the thousands of daily transactions they send over the Bitcoin Blockchain are "fat" and do not help alleviate the congestion. For the fruits of SegWit to be realized, it will need heavier levels of adoption amongst Bitcoin exchanges and wallet developers - something the Bitcoin core developers will continue to push for in 2018.

SegWit adoption is phase 1 in Bitcoin's long term plan for scalability. Once SegWit has been adopted, Bitcoin will focus on implementing what's called the Lightning Network. The Lightning Network is a "layer 2" solution that will enable thousands of Bitcoin transactions to take place outside of the Bitcoin blockchain with minimal fees - at regular intervals, the sum of those transactions will settle on the Bitcoin blockchain. A full explanation of how Lightning works merits another post but many in the Bitcoin development community see great promise in it.

It is going to take time to implement these solutions and, given Bitcoin's explosion in popularity, the network will remain congested in the near future. This means fees and wait times will remain high for now. Further adoption of SegWit and a successful roll out of The Lightning Network will be needed to quiet Bitcoin's doubters. In the meantime, Bitcoin more effectively functions as a "store of value" and is better suited for moving large amounts of value and is unsuitable for small transactions.

Who Will Win?

Bitcoin's current issues with speed and transactions fees are a function of its popularity. A common metaphor used to described the current state of Bitcoin is "the restaurant that no one goes to anymore because its too crowded."

Many on the internet are pronouncing Bitcoin dead because of these issues. A look back into Bitcoin's short history are filled with proclamations of its demise; to date, none of those predictions have come true. Bitcoin, at its core is a technology - technologies don't remain as they are so long as there are people dedicated to pushing them forward. Bitcoin has highly talented and dedicated developers around the world committed to improving it - as long as they exist, Bitcoin has a chance.

Enough people have also disagreed with the direction that the Bitcoin developers have taken the project. Those people have put their efforts and support behind Bitcoin Cash. The success of Bitcoin Cash will equally depend on their ability to move the project forward.

So who will win? No one knows and anyone telling you that they do, probably has an agenda. Maybe they coexist, maybe neither exists 10 years from now. The whole point of Bitcoin was to give people the option of a currency that exists outside of governments. Turns out, it also spawned thousands of options outside of Bitcoin itself - Bitcoin Cash is one of many. Freedom to choose will never be a bad thing so its up to people to do their own diligence an support the projects that most closely align with their own beliefs and values. Ultimately, the free market will decide.

Subscribe

Get notified when new blogs are posted

Email Address

Thank you! If you like to learn more about blockchain and cryptocurrencies, check out my earlier posts

By now, most people know Ethereum as the second most valuable cryptocurrency, currently valued at over $70 billion dollars. Well, it turns out that Ethereum isn't actually a cryptocurrency - it's a software platform that lets programmers build applications on top of blockchain technology. Within the ethereum platform is a cryptocurrency called ether that is used to power applications built on the Ethereum blockchain.

Before I dive into how it works, let's lay out where it came from.

From Bitcoin to Ethereum

Bitcoin uses a global network of computers that maintain a shared ledger called a blockchain that keeps track of who owns bitcoin. Once blockchain technology was introduced to the world, people realized that blockchains could be used to keep track of anything of value. In 2013, a 19 year old named Vitalik Buterin introduced the Ethereum white paper. It proposed an open source platform that would let programmers build blockchain applications that could facilitate the exchange of money, content, property, shares or anything of value. As with Satoshi Nakamoto's paper, Buterin's was met with widespread excitement, and software developers around the world began building toward the vision Buterin had laid out.

Much like Bitcoin, Ethereum isn't owned or controlled by any one person. Unlike Bitcoin, whose creator remains anonymous, Ethereum has a leader in Vitalik Buterin (pictured below). While Buterin doesn't control Ethereum in the way that a CEO does, his word carries tremendous weight in dictating the direction of the project - this might be considered a strength or a weakness, depending on who you ask.

Rumored to be an alien from the planet Neptune (or maybe Canada), this guy is really smart.

Smart Contracts

The basic function that programs built on Ethereum perform are called smart contracts. Smart contracts are digital agreements that execute automatically based on real world data. An easy way to think of them is an "If-then statement." IF condition A exists, THEN perform function B.

Let's say for example Grandma wants to make sure she never forgets to give Little Billy birthday money each year. She could write a smart contract that says IF it's Little Billy's birthday, THEN pay him $10 from Grandma's account. Once this contract is broadcast to the Ethereum network, it will execute automatically each year on Little Billy's birthday.

Smart contracts have applications far beyond improving the reliability and efficiency of Grandmothers around the world. Another simple application of a smart contract is for rental payments: IF date = 1st of the month, THEN pay landlord rent amount. Processes that currently involve manual interactions between two parties can now be automated and the value can be moved in real time over the blockchain rather than settling days later as with traditional banking.

A Real World Example

Ethereum and smart contracts are a big deal because they have the ability to usher in what's been dubbed the "smart economy" - one in which slow manual processes prone to human error and deceit are replaced with automated processes that are completely transparent and trustworthy. A real world example that typifies the new "smart economy" is a project being run by a French insurance company called AXA.

AXA offers a flight insurance product that pays out a policy holder in the event that a flight is delayed by two hours or more. It currently has a product in trial that will pay out insurance claims using smart contracts and the Ethereum blockchain. The smart contract is simple: IF flight is over two hours late, THEN pay policyholder. The smart contract is connected to a database that monitors flight times. If the database shows that the flight is over two hours late, the smart contract is triggered and the policyholder is paid automatically over the blockchain.

Without the smart contract, the policyholder would have to file a claim and wait for the insurance company's claims department to process it, which could take anywhere from 1 to 2 weeks. With the smart contract, neither the insurance company nor the policyholder has to do anything. This also creates trust between the two parties because there are no grey areas - the customer can review the smart contract prior to purchasing the policy and feel comfortable that he will receive his claim in the event of a delay.

Ethereum vs Ether

As stated in the intro, Ethereum is a platform for building blockchain applications using smart contracts. What you may have just purchased on Coinbase is called Ether, which is the cryptocurrency that fuels the Ethereum network.

Ether functions more like a digital commodity than a digital currency. Just like you need gasoline to fuel your car, you need Ether to run applications on the Ethereum blockchain. In the Grandmother example cited above, Grandma would have to purchase small amounts of Ether to fuel her smart contract that pays Little Billy his birthday money.

The Ethereum blockchain functions in the same way as the Bitcoin blockchain: a network of computers run software that validates transactions through majority consensus. The people running these computers are called miners. Bitcoin miners are compensated for their resources by being paid in Bitcoin. Ethereum miners are compensated in Ether. On Little Billy's birthday, Grandma's ether transaction fee will go to whichever miner adds the block containing Grandma's transaction to the blockchain. That miner will also receive new Ether in the process.

The same supply/demand economics that apply to commodities like oil and gas also apply to Ether. Oil is valuable because it powers many of the things we use in our everyday life - it heats our homes and fuels our engines. The more people and enterprises that rely on Ethereum based applications, the higher the demand will be for Ether which will increase its value. As with all cryptocurrencies, there's plenty of speculation baked into the price - speculation that the demand for Ether will increase in the future. Since Ether is valuable, exchangeable and transferable, certain merchants are also starting to accept it as a currency.

dApps - Decentralized Apps

Applications that run smart contracts on the Ethereum blockchain are called "dApps," or decentralized apps. Just as any app developer can build apps on top of Apple's IOS operating system, developers can build on top of Ethereum's blockchain infrastructure. To the end user of a dApp, it might not look and feel any different than the apps you use today. It's the underlying blockchain infrastructure that make them different.

Since dApps function on top of the blockchain, they can be used to transfer value peer-to-peer. To return to our Grandmother example, there could be a dApp that Granny can download that lets her schedule Little Billy's birthday payments without having to code the smart contract herself. dApps are also completely open sourced so other people can access the code and build on top of them. Someone could take the code to the birthday payment dApp and add the ability for Grandma to add a note that says, "Happy Birthday Billy!" Running dApps on the blockchain also offers added security benefits. Since the transactions are distributed and encrypted across the Ethereum blockchain, there is no central place for a hacker to breach and gain access to all of the world's Grandmother to grandson birthday payment data.

At this point, I'm really beating the Grandmother/Little Billy example to death because I think it represents a simple illustration for the kinds of applications that can be built on the Ethereum blockchain. In reality, the dApps that are being built are much more complex. Here are a few examples:

Weifund - blockchain crowdfunding: Users can launch traditional crowdfunding campaigns, but through the use of smart contracts, backers can gain a financial stake in the project. If an indie film gets funded on Weifund, a backer who financed 10% of the project can collect 10% of the film's revenues. Payments will be issued in real time as the film generates revenue.

Ujo Music - Music licensing via the blockchain: An artist can create an original song and register it on Ujo's platform and set their own licensing terms. If a film producer wants to use that song in a movie, they can purchase the rights based on the terms set by the artist who will then get paid directly. This erases the need for industry middlemen like Warner Brothers who end up taking the lion's share of their artist's profits.

Virtue Poker - Online poker secured by the blockchain: At the height of it's popularity, online poker platforms like PokerStars were marred with issues that ranged from deck rigging to the abuse of player funds held by the company. Virtue Poker using Ethereum allows players to fund their bets directly, insuring that no central party can access and misappropriate player money. Their code is open sourced so that users can understand how hands are dealt, insuring that no one can rig the deck. Lastly, players are paid out their winnings in real time over the blockchain so no more waiting weeks for a check to come in the mail.

Ethereum Tokens

So now that you understand that Ethereum is a network for building decentralized applications that require a cryptocurrency called Ether in order to run, I'm going to introduce a confusing concept. Many dApps built on Ethereum have their own cryptocurrencies or "tokens." In order to interact with the dApps, customers need to purchase the dApp's native token.

Here's a helpful analogy I came across - when you go to a waterpark, you pay the admission fee and in return, you get a wristband. That wristband gives you the ability to ride the waterslides in the water park. With certain dApps, the token is the wristband, and a user must purchase it to interact with whatever the dApp offers.

Let's take a dApp called Golem as an example. Golem lets people rent out their excess computing power to people who need it - kind of like a computer AirBnb. To cite this article from Laura Shin, if I'm a computer graphics artist that wants to render some kind of computationally intense animation, I can purchase Golem tokens that let me tap into the Golem network to generate my animation. I then pay the people who are renting me their computers with the Golem tokens. The Golem token is a form of smart contract and this transaction is recorded on the Ethereum blockchain.

Since Golem tokens are also a cryptocurrency, they can be traded on the free market. If I'm a speculator who has no intention of using the Golem network to rent computing power, I can still buy the Golem token on an exchange in hopes that it appreciates in value. Like bitcoin, there is a fixed supply of Golem tokens so if the demand for the service increases, so will the value of the token. If I bought Golem at its original price of around 1 penny and still held it today, I would have made 35X my initial investment, since Golem tokens currently trade at round 35 cents apiece.

ICOs

ICO stands for "Initial Coin Offering" which is a fundraising mechanism for cryptocurrencies that has exploded in popularity this year - the majority of them are held on the Ethereum network. Similar to a kickstarter campaign, they allow entrepreneurs to raise money for projects by giving investors an early opportunity to purchase the cryptocurrency before the final product has been built. If the project is successful, the value of the cryptocurrency will rise in value and early investors can sell it on the open market for a profit.

ICOs have stirred up a lot of controversy because they represent a risky proposition with zero investor protection. Let's say I wanted to build a casino and, to finance it, I gave investors the opportunity to buy chips that could be used at my roulette tables once the casino opened. If you bought $100K in roulette chips from me and I decide that I no longer want to build the casino, you're stuck holding worthless chips. If investors don't form their due diligence, they may end up buying tokens for a project whose creators never intended to build it in the first place - the creators walk away with the money and the investors have no way of recouping their funds.

On the other hand, early investors in projects that go on to be successful have the opportunity to make enormous returns. For example, people who invested $1,000 in the Golem ICO would be sitting on $35,000 at it's current price of $0.35 - if it ever goes to $10, they will be millionaires. Another positive aspect of ICOs is that they let anyone, rich or poor, get involved in early stage investing. To invest in a company like Twitter or Facebook pre-IPO (initial public offering), you need to be an accredited investor - this basically means you're already a person of means. With ICOs, all you need is an internet connection and a little bit of money and you have the potential to become wealthy by investing in the right projects.

Far From Perfect

Ethereum has the potential to change the way humans transact with one another, but it is still a very young technology and it hasn't been without its problems. While the blockchain architecture underlying the Ethereum network is secure, not all of the applications built on top of it are. Faulty code can and has made applications vulnerable to hacking and malfunctions. Here are two prime examples:

DAO Hack - DAO was a dApp built on Ethereum that enabled crowd based venture capital. DAO token holders were given the right to vote on projects they wanted to support - if projects went on to be successful, DAO token holders would receive financial rewards. The DAO ICO received $168 million in funding. The DAO software was hosted on the Ethereum blockchain and was publicly visible by all. A hacker spotted a flaw in the DAO's code that enabled him to route $55M in ether held by the DAO into an account that he controlled. The Ethereum team had do do something called a hard fork (something I won't get into now) to reverse the hack and return the stolen funds.

Parity Wallet Freeze - Parity is a wallet where people store Ether. A flaw in Parity's code let a user delete a specific line of code that was necessary for accessing funds in a Parity wallet. This led to $280 million dollars worth of ether being frozen - it hasn't been stolen but it can't be accessed either. Parity Technologies has proposed another hard fork to correct the issue - something that is sure to divide the Ethereum community and rattle user confidence.

Despite the world changing implications that Ethereum dApps and smart contracts have, the trouble is that any programmer can write them - if they aren't written properly, they can behave in unintended ways and be exploited as in the above listed examples. Ethereum is still a very young network and security issues with dApps and smart contracts will have to be sorted out if it's to reach its true aspirations.

Additionally, the network needs be able to handle a higher volume of transactions. Similar to Bitcoin, Ethereum is subject to congestion when transactional volume gets high. Recently a dApp called Cryptokitties, where users trade digital cats, got so popular that it bogged down the entire network. Ethereum does have scaling plans in place, that they'll need to implement.

Leading The Decentralized Revolution

“Ethereum aims to take the promise of decentralization, openness and security that is at the core of blockchain technology and brings it to almost anything that can be computed.”

— Vitalik Buterin - Ethereum creator

Imperfections aside, Ethereum is currently leading the decentralized revolution. Bitcoin is the world's first decentralized currency that operates on a global network of computers outside of central intermediaries. Ethereum gives programmers a platform to develop a decentralized version of just about anything.

Decentralized networks like Ethereum have the power to remove the intermediaries that currently exist between producer and consumer. Let's take a company like Uber. Uber is a platform that brings people who need rides together with people who have cars. To facilitate this interaction, Uber collects 20% of every fare. With Ethereum and blockchain technology, there is nothing to prevent a bunch of software developers from writing a dApp that creates a decentralized Uber. Instead of 20% per ride, transaction fees are paid to the network and the driver takes home the lion's share of the transaction. Tokens can be issued that represent ownership in the network. Coders who work on improving the network can get paid for their efforts in ownership tokens. Non-technical people can come up with marketing campaigns that spread awareness for the network and also get compensated in ownership tokens. As the decentralized Uber network grows and improves, the value of its ownership token increases, rewarding the people that built it. The result is what is referred to as a "Decentralized Autonomous Organization", and there's a strong possibility that DAOs replace a lot of the world's biggest corporations.

This may sound like a radical concept, but blockchain technology enables these kinds of decentralized organizations to exist - Ethereum provides the tools for people to go out and build them.

If you found this to be informative, hit the like button down below and share this post on social media. To stay up to date on all things blockchain and cryptocurrencies, subscribe to my website. Send any feedback to connor@cryptoambit.com.

Subscribe

Get notified when new blogs are posted - make sure to confirm your subscription via email

Email Address

Check your email after signing up to confirm the subscription (may go to your spam folder)

In my opening post, I cited Bitcoin's skyrocketing price as a distraction from blockchain's potential to be the most revolutionary innovation since the creation of the internet. In addition to distracting from blockchain's promise, I think that the price of bitcoin the currency serves as a distraction from just how revolutionary Bitcoin the technology truly is. While the mainstream media debates endlessly on whether or not bitcoin merits its $12,000 price tag, they don't seem to spend much time covering just how incredible it is that a $200 billion dollar global financial network without any formal government or corporate structure cropped up out of nowhere. Where Bitcoin came from and how it works is a fascinating story which I'll attempt to cover here.

Before I go into the Bitcoin origin story in depth, here it is in one paragraph:

In 2008, some anonymous person (or group) using the name Satoshi Nakamoto published an 8 page paper to an internet forum that laid out the framework for an internet currency that operated outside of banks and governments. To keep the currency secure, Nakamoto came up with a clever system that would incentivize people all over the world to run software that would secure the network by maintaining a shared record of transactions (blockchain). This software was open sourced which means that anyone in the world could contribute to it and help make it better. In the years since it was unleashed on the internet, thousands of people contributed to the code, built businesses and infrastructure around the Bitcoin network and adopted the currency. In that time, the value of one bitcoin went from eight hundredths of a penny to over $12,000; a $200 billion global financial network emerged from the depths of the internet. To this day, Satoshi Nakamoto's identity remains unknown.

Now let's go a little deeper...

Bitcoin is a difficult thing to wrap your head around, mainly because nothing like it has ever existed before. Bitcoin (with a capital B) is a global network that facilitates the transfer of the bitcoin (lower case b) currency, relying on a decentralized network of computers rather than trust in centralized institutions. There is no Bitcoin headquarters, where the Bitcoin CEO discusses the 4th Quarter Bitcoin earnings report in a boardroom full of Bitcoin executives. Bitcoin simply exists on the internet, owned by no one and maintained by thousands of passionate people all over the world.

From the Depths of The Internet

The Bitcoin story began on a cryptography message board when the world was in the midst of the 2008 financial crisis, a time when trust in traditional financial institutions was at an all-time low. A mysterious poster using the name Satoshi Nakamoto posted a paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System. It laid out the framework for "a purely peer-to-peer version of electronic cash" that would replace the need for trust in banks and governments with reliance on computer code, algorithms and cryptography.

So what was so special about Nakamoto's proposal? It was not the first digital currency ever attempted - it had several predecessors that all failed, mainly because they were unable to solve what's referred to as, the "double spend problem", without appointing some kind of trusted 3rd party to make sure no one was cheating the system. If a 3rd party is needed to verify transactions, it starts to look like a bank, which is precisely what Bitcoin aimed to avoid.

The "Double Spend Problem"

In the physical world, exchange is simple: if I hand someone a dollar, they have it and I no longer do. In the digital world, if I send someone a file, I'm not sending the original - I'm sending a copy: I retain the original and the person I sent it to has a copy. That scenario applied to a currency would be disastrous, and is referred to as, "the double spend problem".

So how could Nakomoto get someone to trust that the bitcoin they're receiving online wasn't a copy that had already been spent elsewhere without having a bank or trusted third party like PayPal verify it? Having all transactions be processed through a central authority was counter to what Bitcoin aimed to accomplish, because it would concentrate power in one place. What Bitcoin needed was a way of validating transactions without a central authority.

Enter: Bitcoin Miners

To avoid the need for a central record keeper, Nakamoto ingeniously devised a system in which thousands of record keepers would validate new transactions through majority consensus. These people are called "Bitcoin miners" and, by downloading the bitcoin software, they collectively maintain the decentralized Bitcoin network in the form of the Bitcoin blockchain. For playing their part in maintaining the accuracy and security of the bitcoin network, miners are paid in newly created bitcoin, as well as transaction fees. Mining serves two basic functions:

Secures and updates the bitcoin network

Introduces new bitcoins into circulation

How Mining Works

In my opening post, I established that a blockchain is simply a ledger of transactions distributed across a network of computers. That ledger is made up of blocks that chronologically list every transaction that has ever occurred. These blocks are linked through cryptography which means that once a new block is added, it is permanent and can't be altered. Miners are the ones that collectively update the blockchain by agreeing on which blocks of transactions to add to the blockchain through what's called a "consensus algorithm."

When new bitcoin transactions occur, they are broadcast to every miner in the network, upon which each miner collects those transactions into a block. Only one miner wins the privilege of adding their block to the blockchain, collecting newly created bitcoin and transaction fees in the process. To win that privilege, they have to do what's called proof-of-work. Warning: here's where things start to get weird, so bear with me.

To complete proof-of-work and win the privilege of adding the next block, miners use their computers in a competition to solve a complex and time consuming math problem. When a miner solves the problem, they announce it to the network, along with the next block of transactions. At this point, the rest of the miners verify that the transactions in the block are valid by checking them against the history of the blockchain. If 51% of the miners agree on the transactions contained in the block, a signal is sent to the network to update itself and the transactions become irreversible. At this point, the process starts all over again.

More On That Math Problem

This weird mathematical competition is what makes the bitcoin network secure. Miners have to solve this computationally difficult math problem because it ensures that it takes actual real world resources to add transactions to the blockchain - solving the problem requires computing power, which requires electricity, which costs money. As I stated above, 51% of the miners need to agree on the transactions within a block before they become irreversible. This means that if any bad actor acquired 51% of Bitcoin's mining power, they could theoretically add false transactions to the blockchain. Since the global bitcoin network has 100x the computing power of Google, this would be incredibly cost prohibitive to do. With the energy it costs to complete proof-of-work, it would cost billions of dollars to acquire 51% of the mining power and double spend just one bitcoin; at that price, you would be better off putting those resources into earning bitcoin the honest way just like the rest of the miners.

Why Is It Called Mining?

The term mining conjures up images of dirty men in overalls with pick axes and hard hats pulling gold from the ground. While bitcoin mining involves none of those things, there are some similarities to gold mining from which the name is derived.

Gold is a scarce resource and extracting it from the earth costs money in the form of equipment and labor. Bitcoin is also a scare resource that costs money to acquire in the form of the mining equipment and electrical output described above - only when those resources are spent to win the block reward are new bitcoins created. Bitcoins are a scarce resource because Nakamoto's protocol dictates that there will only be 21 million bitcoins ever created. Originally, the miner reward for adding a block was 50 bitcoin, before it was halved to 25 and then halved again to the current reward of 12.5 bitcoins per block. It will continue to halve at regular intervals until the year 2140, when no more new bitcoins will be introduced into circulation and miners will be paid solely in transaction fees.

Mining Summary

So that's the meat and potatoes of how bitcoin works: miners run software that enters them into this complicated mathematical competition to determine which miner gets to add the next block to the blockchain. When a miner wins, pending transactions on the bitcoin network are added to the blockchain and become irreversible. The miner receives newly issued bitcoin as well as transaction fees, which was their incentive to run the Bitcoin mining software in the first place.

Still confused? Join the club: mining is a confusing process. The most important take away is that mining is how a decentralized currency functions and remains secure. If John gives me a check for $100 USD, I deposit it to my bank and trust that the banks will tally that I have $100 more and John has $100 less. If John pays me 1 bitcoin, mining is the process that the bitcoin network uses to securely record that I have 1 more bitcoin and John has 1 less, while insuring that John actually had the 1 bitcoin to pay me to begin with.

The Importance of Decentralization

When learning about Bitcoin and blockchain technology, decentralization is a concept that you will see often. Bitcoin's decentralized nature allows it to operate globally, without being shut down by any government or environmental disaster and without being controlled by any single powerful entity.

To illustrate the importance of decentralization, think of Napster versus a peer-to-peer file sharing service like Gnutella. When the United States decided that Napster was illegal, they went to the Napster headquarters and demanded they shut down their servers - Napster was dead. Meanwhile, P2P file sharing services like Gnutella that allow people to share music for free exist to this day because there is nothing to shut down. The network exists across thousands of users that have downloaded the Gnutella software. Bitcoin has no central point of failure which means that if the Chinese government, for example, wanted to try and shut down Bitcoin by making mining illegal, the network would be unaffected because the rest of the miners around the world would continue operations as normal. To shut down Bitcoin would mean you would have to shut down the internet - not going to happen.

From Rags To Riches

So how did Bitcoin go from being worth eight-one hundredths of a penny to over $12,000 per bitcoin? For the first two years, it was basically unknown outside of the developing community of programmers that wanted to see the project succeed. The first ever bitcoin transaction occurred when one Bitcoin user agreed to sell another two Papa John's pizzas in exchange for 10,000 bitcoin. There's a twitter account that tracks the present day price of those pizzas- worth over $120M in today's dollars at the time of this writing.

Bitcoin first came into public awareness with the creation of The Silk Road: a decentralized marketplace that launched in 2011 where any product could be bought or sold (including illegal drugs). Bitcoin was this internet marketplace's currency of choice and the price shot up to around $10 based on demand. When Gawker ran a piece on Bitcoin's role within The Silk Road, the price jumped up to $30.

In 2013, the tiny Mediterranean nation of Cyprus fell into financial crisis and started dipping into their own citizens' bank accounts to bail themselves out. This painted a clear use case for a currency that existed outside the control of governments and the price shot up again to $230. Then the Chinese markets started pouring Chinese Yuan into bitcoin, seeing an opportunity to get their money out of an economy they feared was in danger of collapsing; bitcoin surged to over $1,200.

Then from 2014 to 2015, the music stopped and a series of events brought bitcoin back to earth. China, fearing that Yuan would continue to pour into bitcoin, ruled that it was "not a currency in any true sense of the word" and tightened controls. The FBI arrested the founder of The Silk Road and the most popular exchange for buying bitcoin (Mt. Gox) collapsed due to mismanagement. These 3 events caused panic in the markets and sank bitcoin to a low of $200, but the network rolled on.

In 2016, bitcoin showed its resilience, recovering to just under $1,000 at the end of the year. In 2017, bitcoin went parabolic on global interest, surging to its current high of $12,000. In addition to mainstream global awareness, the price surge is due to more and more people and institutions viewing bitcoin as a legitimate asset rather than a scary magic internet currency. Two of those institutions are The Chicago Mercantile Exchange and The Chicago Board Options Exchange, which will be launching bitcoin futures markets this month - a sign that Wall Street and the mainstream financial world is taking Bitcoin seriously, in a big way.

Bubble Waiting To Burst?

So what could possibly justify bitcoin's value? All a bitcoin is is a string of 1's and 0's on a digital ledger, so how could something that has no physical representation be worth over $12,000?

First off, anything can have value if people agree it has value. Throughout history, that has included anything from cows, to seashells, to rare metals, to paper currencies backed by governments. In today's digital world, people have agreed that something that is purely digital has value - the price of that value is, and will always be, determined by free markets.

Here's where bitcoin's value is derived:

Scarcity: The Bitcoin protocol dictates that there will only be 21 million bitcoins ever created; unlike fiat currencies, where governments cause inflation by continually printing new currency, bitcoin is deflationary. Bitcoin is similar to gold in that it derives value from being scarce. Increased demand for a scarce asset drives up its price.

Utility: Bitcoin's utility is two fold:

Medium of Exchange- anyone with an internet connection can transact with anyone, anywhere in the world. If I wanted to send $10,000 to someone in another country, the quickest way to do it with fiat currency is to take it on a plane and bring it to them in cash. With bitcoin, it can be done in minutes.

Store of Value- Due to its scarcity and the security of the bitcoin network, bitcoin is similar to gold in that it is a place to store your money outside of government issued currency. While gold has a couple of hundred years head start on bitcoin, with each passing day bitcoin's reputation as an effective store of value grows more and more true - ask Paypal founder Peter Theil .

Community: Just like Facebook is valuable because billions of people use it, the growing bitcoin community of developers, miners, businesses and people who transact in bitcoin give it tremendous value. In 2016, $100,000 worth of bitcoin was transacted every minute and 2017 saw bitcoin's user base grow to over 19 million. With more and more users entering the network each day and with 2.5 billion people in the world who don't have access to traditional financial services but do have access to the internet, the potential for the Bitcoin network to grow is tremendous.

Speculation: There's no question that speculation plays a huge part in bitcoin's current valuation. Speculation that this scarce asset's utility and community will grow in time has driven the price well beyond it's present day utility value. If Bitcoin adoption fails to live up to expectations, bitcoin's value will surely fall.

Last Word

Bitcoin is, and will continue to be for the foreseeable future, subject to wild swings brought on by the speculation of the crowd . However, regardless of speculation, Bitcoin is valuable because there is utility in a borderless, non-government issued currency that can move at the speed of the internet. If you live in America, you might not see the need for it in your everyday life because the dollar is stable and we have cool things like Venmo and Applepay that make transacting seem effortless. If you live in Venezuela or Zimbabwe, where you need 8 duffle bags full of your hyper-inflated currency just to buy a sandwich, you might be more inclined to agree.

That's not to say that bitcoin is perfect, or anywhere close to it. For one, its mining process has raised environmental concerns over the amount of electricity miners burn to maintain the network. Secondly, the network is currently prone to congestion which raises transaction fees, making it too expensive to use for small purchases. Thirdly, people are more likely to hoard it than use it as a currency as originally intended due to expectations that its price will continue to rise. Fourthly, the network can't handle anywhere near the capacity that something like Visa or Mastercard can, so much innovation is needed if it's going to reach mass adoption. Lastly, bitcoin is still figuring out what it will ultimately become: a global internet currency, digital gold, or both - a subject that is hotly debated within the Bitcoin community.

Whether you think bitcoin is the future of money or a speculative craze bound to collapse, I think one thing is beyond debate: Bitcoin is an absolute marvel of modern technology and human collaboration and a testament to the crazy times in which we live. A completely anonymous person (or group) posts a paper and some code to the internet and the end result is a $200B global network that is challenging the way we think about trust and money. If that weren't enough, it gave the world the blueprint for blockchain technology that is likely to change the way we transact forever.

If you found this to be informative, hit the like button down below and share this post on social media. To stay up to date on all things blockchain and cryptocurrencies, subscribe to my website. Send any feedback to connor@cryptoambit.com.

Subscribe

Get notified when new blogs are posted

Email Address

Check your email after signing up to confirm the subscription (may go to your spam folder)

At this point, the exploding value of bitcoin, ethereum and the $300 billion dollar cryptocurrency market has caught most people's attention. Every major news outlet is covering this market's meteoric rise along with the debate over whether or not these currencies are here to stay or are destined to implode. With high profile people like JP Morgan's Jamie Dimon calling bitcoin an outright "fraud" that is only useful to "drug dealers and murderers", and Nobel prize winner Joseph Stiglitz saying it "ought to be banned," people are trying to figure out if they should invest their money or avoid it like the plague.

While the bitcoin debate and the rise of the cryptocurrency market has been fascinating to watch unfold, they may be distracting everyone from what is arguably the more interesting story: the blockchain technology that powers bitcoin and all cryptocurrencies has the potential to be the most disruptive and game changing innovation since the invention of the internet. Whether you realize it or not, every government, financial institution and major corporation have dedicated teams researching blockchain technology's implication on their future, and there are thousands of talented developers and entrepreneurs around the world pouring their resources into every kind of blockchain startup imaginable. So what's the hype about?

What Is Blockchain?

Simply put, blockchain is a new way to keep track of who owns what.

A blockchain is a continuously updated digital record that chronologically and publicly keeps track of transactions. A network of thousands of computers all over the world use cryptography to verify the validity of each transaction within the network before permanently adding them to a publicly viewable ledger of every transaction that has ever occurred. Since this ledger is distributed on computers all over the world, it can't be hacked or corrupted.

The bitcoin blockchain is the world's first and most popular blockchain network and keeps track of who owns bitcoin, but blockchain technology can be used to track the ownership of any digitized asset- i.e. data, title to real estate, company shareholdings and even the ownership rights for art and music. Furthermore, it's possible to digitize, or "tokenize", any physical asset from a house, to a car, to a pair of shoes, making this technology applicable to just about any transaction imaginable.

How It Works- A Bitcoin example

Let's say Jake wants to send Terri 1 bitcoin. Jake will go to his computer and enter Terri's internet address with the command to send 1 bitcoin. This transaction is then broadcasted to the network for approval. Once the network approves of the transaction, it is placed in a "block" with other newly approved transactions and added to the permanent "chain" (ledger). The public ledger will now show that 1 bitcoin has been transferred from Jake to Terri; if Jake tried to send the same bitcoin to Jeff, the network would see that he had already sent it to Terri and the transaction would be rejected. (Note: while transactions are listed publicly, no personally identifying information is shown- it's just a string of data that only Jake and Terri would recognize).

The Internet of Value

Blockchain is revolutionary because for the first time in human history, we can transact value from person to person over the internet, outside of centralized intermediaries like banks and governments. In traditional financial transactions, a third party or "trusted middleman," like a bank or clearing house, sits between parties in the transaction; these middlemen facilitate the transactions and extract large fees to do so, while sometimes taking days or even weeks to complete them. Blockchains replace the middleman by facilitating transactions through its automated decentralized network of computers and placing them on a permanent, public ledger that can be trusted by all parties.

Blockchain has been referred to as "the trust machine" because it removes the need for trusted third parties and replaces them with math and cryptography. An online merchant today may not accept a payment from a customer in Nigeria because they may not trust the customer's bank. If they were accepting payments over the blockchain, they wouldn't care where the customer was from because it is not possible to process fraudulent transactions through the blockchain. This simple example illustrates blockchain's potential to hyper-connect the world through commerce like never before, and effectively do for money what the internet did for information.

Here's a couple of real world use cases:

International Remittances- Every year, people who've emigrated from their home countries send back 5 billion dollars to family members around the world. The only option these people have is to go through middlemen like Western Union that channel funds through an antiquated financial system that can take over a week to get the money from A to B; what's worse is that the fees can be as high as 20% and are levied on the poorest nations in the world. If sent over a blockchain, funds can go from the sender to the receiver in seconds at a fraction of the cost.

Real Estate- Real Estate transactions involve a sea of middlemen and blockchain has the power to disintermediate them all - banks, lawyers, brokers and title companies. To buy and sell real estate, a title insurance company must be obtained to manually confirm that the seller actually owns the property and is free and clear of any liens; for their work, title companies command a hefty percentage of the final sale price. If the ownership history of the property were stored on a public blockchain, the expensive manual process of identifying past owners and liens can be automated and completed in seconds, saving the buyer and seller thousands of dollars. By tokenizing the ownership rights to the property and transacting it over the blockchain, the process for selling a house starts to look more like sending an email than the complexity of commission-seeking lawyers and brokers that it is today.

Foreign Aid- Currently, funds donated for disaster relief have to go through a chain of middlemen, subject to high fees, and corrupt foreign governments before getting to their intended destination. For example, after the 2010 earthquake that devastated Haiti, $500M in relief was donated through the Red Cross; it was later found that a significant amount of the funds were either completely misspent or ended up in the pockets of corrupt government officials. Every transaction sent through a blockchain receives a timestamp and is recorded to the public ledger - this adds accountability and transparency to the process by enabling the Red Cross to track when funds arrive and where or to whom they are allocated. With blockchains, the Red Cross and its donors will be able to track their funds much in the same way that a Domino's customer can track their pizza delivery from the Dominos oven to their front doorstep.

Transacting money and property is just the tip of the iceberg; blockchain technology also has application in identity management, supply chain management, voting and government to name a few. And what's really exciting is that this technology is still in its infancy and, just as the most ambitious thinkers couldn't predict how the internet would change the world, it's too early to truly foresee the impact that these innovations will have.

Coming soon, to an economy near you

At this point, chances are blockchain hasn't made any impact on your day-to-day life; however, if you take a look at the companies that are making big bets on the technology, that is very likely to change:

The reason that they're all hopping on the blockchain bandwagon isn't because all of these companies and governments are super stoked about bitcoin (quite the opposite). It's because they see the potential for private blockchains to eliminate inefficiencies, streamline operations and save them millions of dollars. Corporations also know that if they don't implement this technology, they're in danger of being replaced by competitors that do.

As I stated earlier, blockchains are good at keeping track of who owns what, and are not limited to just currency - in a business sense, the "what" can be anything from corporate data to raw materials. Here are some basic examples of how governments and corporations will utilize blockchain technology:

Supply Chain Management- The bitcoin blockchain is a complete record of every bitcoin transaction ever made. For supply chains, replace the bitcoin with potatoes, bananas or whatever materials you're moving and you get a perfect record of every movement throughout your supply chain. A company like Taco Bell can use a blockchain to track the movement of all the different ingredients coming from various suppliers; in the event that one supplier distributed lettuce contaminated with salmonella, they can search their blockchain to quickly identify the contaminated lettuce and remove it from circulation.

Data Security- Currently, most companies store all their data in one centralized database; essentially, all a hacker has to do is breach one firewall and all of that company's data is stolen (think recent Equifax & Yahoo breaches). Blockchains allow companies to break their data down into smaller pieces and store it on thousands of computers all over the world. This is a more secure way to store data because hacking into thousands of computers simultaneously is much more difficult than hacking into one. Additionally, not having a central point of failure means that worrying about a data storage facility burning down is a thing of the past.

Trade Settling- If you work on Wall Street, you're familiar with the term, T+2, or trade date plus two days. This means that exchanging shares from party A to party B takes two days to settle because there are a series of departments and institutions that each have to sequentially process and account for different parts of the transaction. Blockchain, through the use of "smart contracts," will enable the automation of these manual administrative processes turning T+2 into T+0.

Audit & Accounting- Blockchains automatically create permanent audit trails of whatever information they process, so there's potential for companies and governments to eliminate hours of administrative data management and audit processes. If two departments or companies transact over the blockchain, they don't have to each individually do their own audit and reconciliation since blockchains create a shared, unalterable record of what happened.

Stay Tuned

While I have no idea what will ultimately happen with bitcoin and the broader cryptocurrency market, I can confidently say that blockchain technology is not going away; in fact, many are predicting that 2018 is the year that this technology moves from being experimental to being used broadly in the real world. How it all unfolds will be fascinating to watch.

So... that's my spiel on why I think blockchain is pretty important and why you should too. In case that didn't do it for you, I'll leave you with a few quotes that I've come across that got me jazzed up about blockchain initially:

“The technology most likely to change the next decade of business is not the social web, big data, the cloud, robotics or even artificial intelligence. It’s the blockchain technology behind digital currencies like bitcoin”

— Don Tapscott

“Over the next 20 years, our money will be coded- broken down into 1s and 0s and wrapped within powerful tools for encryption. We’re still only beginning to discover the possibilities that digital currency will open up. But the code-ification of money, market payments, and trust is the next big inflection point in the history of financial services. Understanding what it means for you and your business will be important regardless of whether you are a plumber or the CEO of a Fortune 500 Company. ”

— Alec Ross- Industries of The Future

“I believe that the blockchain is, even now, ushering in a new economic and social paradigm that will rival, if not exceed, the impact that agriculture had in human society.”

— John McAfee

Up next... the bitcoin story.

If you found this to be informative, I'd appreciate it if you would hit the like button down below and share this post on social media. To stay up to date on all things blockchain and cryptocurrencies, subscribe to my website. Send any feedback to connor@cryptoambit.com.

Subscribe

Get notified when new blogs are posted

Email Address

Check your email after signing up to confirm the subscription (may go to your spam folder)

So why am I in Singapore right now? Well, the story began about six months ago when I was reading The Industries of The Future by Alec Ross. The chapter entitled The Codification of Money contained a segment on Bitcoin and something called "the blockchain" that together, Ross said, formed a revolutionary new form of internet money with world changing applications.

At the time, Bitcoin was surging from $1,000 to $2,000 per unit which served to further pique my interest. From there, I started reading more and more about this mysterious internet currency and the blockchain technology that enabled strangers on the internet to transact without banks or intermediaries. Before I knew it, I had descended down the ultimate rabbit hole that revealed how these technologies are in the process of transforming finance, governments, and society as a whole.

So why Singapore? For starters, there are some really interesting things going on with blockchain technology in Singapore. The MAS (Monetary Authority of Singapore) has taken a regulatory friendly stance on this emerging industry, making it a hub for activity and innovation. They're also currently experimenting with turning the Singapore dollar into a cryptocurrency. And, if you read my previous blog, you know I love South East Asia as well as inserting myself in unfamiliar situations and seeing what happens. Singapore will allow me to do exactly that.

My goal is to write something that ultimately leads to a career within this emerging space while gaining a better understanding of these complicated and nuanced technologies in the process. Additionally, I hope to help whoever reads this gain a basic understanding of what blockchain technology and cryptocurrencies are and why they're important. After all, it seems quite possible that they end up being as big a part of your daily life as the internet is today while potentially shaking up whichever industry you currently work in.

In my first couple of posts, I'll attempt to explain the basics of blockchain, bitcoin and the overall cryptocurrency market. From there, I'll see where the rabbit hole takes me.

Subscribe, share and send any questions or feedback to connor@cryptoambit.com.

Subscribe

Get notified when new blogs are posted

Email Address

Check your email after signing up to confirm the subscription (may go to your spam folder)